Dow Flirts With November Low

Fear gripped Wall Street Tuesday as stocks barely averted setting a new bear-market low and safe-haven investments climbed, underscoring investors' widening suspicion that the global slowdown is here to stay for some time.

Their mood was soured Tuesday by dire developments overseas, combined with uncertainty about key matters in the U.S. including whether the auto industry can survive, whether big financial firms can right themselves without being nationalized, and whether a $787 billion stimulus package will deliver a sufficient jolt to spur growth.

The Dow Jones Industrial Average slid 297.81 points, or 3.8%, to 7552.60, just a fraction of a point above its late-November low that has so far held up as the trough of the bear market. At its afternoon low, the blue-chip measure dipped a hair below the old closing mark.

The S&P 500 dropped 4.6%, hurt by declines in every sector, including a 9.9% plunge in the
financials
.
The Nasdaq Composite Index skidded 4.2% while the Russell 2000 tumbled 4.3%. The far-reaching slump rattled investors, sending the Chicago Board Options Exchange Volatility Index, a barometer of investor anxiety, up 13%.

Veteran traders and analysts are increasingly resigned to the possibility that the market may finish beneath its old low mark in the days ahead. The main debate now on Wall Street is whether that would set off a renewed avalanche of selling or quickly result in a new low that will prove more durable.

Keith Wirtz, president and chief investment officer at Fifth Third Asset Management in Cincinnati, estimated that the market could slide another 5% to 10% if it closes below its late-November lows. He said that his firm has been keeping a closer eye on chart-based trends. "The technicals matter a lot in this environment," he said.

Worry that the economic outlook is deteriorating beyond prior expectations is also playing a critical role in the markets, pushing down stock and commodities prices and driving up gold, Treasurys and other safe-have investments.

"The hopes for any kind of economic recovery have been pushed way back," with key measures of the U.S. economy's health unlikely to improve until perhaps sometime next year, said U.S. Bank portfolio manager Jim Russell. With that in mind, he said his firm has been steering clients away from U.S. stocks and into high-grade corporate bonds and municipal debt.

ENLARGE

Mr. Russell has also been avoiding Treasurys, which have surged lately. Some analysts think government debt may be due for a pullback as the U.S. issues a mountain of new debt to pay for unprecedented efforts to prop up the private sector. "The only reason Treasurys have done well lately is because they're the anti-equities trade," said Mr. Russell.

Treasury prices bounced on Tuesday, with the two-year note climbing by 6/32, lowering its yield to 0.875%. The 10-year note climbed 2-2/32 to yield 2.662%.

The U.S. stock losses come on the heels of big declines overseas. Asian stocks suffered losses Tuesday, with financial stocks such as Industrial Bank of Korea and Mitsubishi UFJ Financial Group sliding on fear the global economic crisis is deepening and a recovery could take longer than previously expected. Japan's Nikkei 225 slid by 1.4%, while the Shanghai Composite fell 2.9%.

Fears about the health of banks pulled markets lower in Europe after Moody's Investors Service said it may downgrade the ratings of lenders with exposure to Eastern Europe. Moody's said faltering economic conditions in Eastern Europe will continue to hit the asset quality and liquidity positions of local subsidiaries of major Western banks, which could spill over to their corporate parents.

"The financials are still the biggest concern for this market," said Wachovia Securities strategist Al Goldman. "A lot of investors are still worried about possible nationalization of some banks."

Gold prices continued to push back toward the $1000 plateau. Comex gold for February delivery gained $25.50 a troy ounce, or 2.71%, to settle at $967.00 in New York, its highest settlement since July 17, 2008. Gold has now risen in seven of the last nine trading days, and is up 9.4% for the year to date.

Gold was boosted in part by news that the Russian central bank increased its holdings of the metal by about $1 billion in January to $15.5 billion, with more buying likely to come throughout the year. Central banks around the world in recent years have been net sellers of gold, but Russia's adjustment was the latest signal that that trend may be shifting.

Gold is also experiencing unprecedented volatility lately, often moving in the opposite direction as stocks each day. Gold's Volatility Index soared 14% on Tuesday at the Chicago Board Options Exchange.

The dollar strengthened against major rivals. One euro cost $1.2608, down from $1.2779 late Friday. One greenback fetched 92.30 Japanese yen, up from 91.73 yen.

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